TUPE & share incentive schemes

If you acquire employees as a result of a TUPE transfer one of the requirements under the TUPE regulations is to offer employees “substantially equivalent” share incentive schemes.  This can create difficulties for the new employer as its shares and the share value could be wildly different from the transferring old employer.  We explore possible solutions based on our experience of working with employers.

We look at:


The TUPE transfer can arise under a number of transactions such as selling a business, out sourcing agreements, framework agreements, collaboration agreements, internal re-organisations of subsidiary companies or the creation of a new holding company. TUPE applies to any employer and there is no recognition of the old or new employer’s size.

The employee may hold shares or options in the old employer.  TUPE in theory attaches to any form of employee incentive from EMI options, CSOP options, unapproved options and shares which have targets attaching such as  growth shares.  Arrangements operated by private companies can often not be replicated by larger employers and vice versa.

Impact for share incentives under TUPE

A business acquisition can be structured as either:

  • A share sale upon which the employees stay employed with the current employer; or
  • An asset sale where the employers transfer to a new employer.

If the new employer cannot maintain the existing share plan(s), or declines to maintain the plan(s), then the new employer may be liable for compensation. Liability depends on the facts.

Share sale

Many share option plans permit employees to exercise their share options and become shareholders when the group or subsidiary is sold. Unless the employees and other shareholders have different classes of shares they will be dealt with in the same way in accordance with the articles and or shareholders’ agreement.  Post acquisition, the acquirer can choose to implement a new plan, but has no obligation to implement a replacement plan.

If the employees are option holders then under some plans there is provision for the shares under option to be rolled over into the acquirer under a share for share mechanism.  There can be complications around working out how many shares in the old employer can be rolled over for shares in the new employer.

Under many of the HMRC approved option plans it is possible to preserve the qualifying periods for tax relief on eventual exercise of the option.

Asset sale

TUPE has substantial implications for employers in relation to employee incentives. Case law suggests that the new employer might have to offer a replacement arrangement which is ‘substantially equivalent’ to the plan provided by the old employer. Whether a plan is sufficiently equivalent is judged on case-by-case basis.

The new employer, who does not offer a ‘substantially equivalent’ plan, can face claims in the Employment Tribunal. Employers should consider creating their own share incentive plan to reduce this risk.  If employers cannot create a share incentive plan, then they may have to compensate the new employees for their loss.

Share incentives and TUPE

The employer should carefully consider:

  • The terms of the plan; and
  • The difference in respective values of the shares under option;
  • The market for the shares held by employees.

Is compensation payable

The calculation depends on the facts, and is different for share and asset sales.  Consider:

Tax-advantaged status

If the transaction results in a loss of tax-advantaged status, then this is a loss to the employee. Many plans include an appropriate disclaimer of liability in the event of loss of approved tax status. Although there is little case law to establish precedence, it is likely that such a disclaimer would be enforceable.

TUPE and compensation

If a TUPE transfer results in the loss of a right to participate in a share plan, the employee may have a right to compensation.  The compensation should account for the amount the employee would expect if they cashed out their share plan.  Account can be taken of whether the employee will receive benefits under the transfer, that s/he didn’t enjoy pre-transfer.

Share options

If the transaction price per share is less than the option price, claims to compensation are unlikely. The employee can just let the option lapse. The advantage of options is that they are a one-way bet.


If the employee or director has bought shares, and the TUPE transfer generates a loss compared with the price paid by the employee on acquisition, then the employee will not have a claim to compensation. The employee is the same position as any other shareholder, unless otherwise agreed.

Challenges to the award of compensation following loss under a TUPE transfer

Employees generally find it difficult to challenge the compensation offered by employers as a result of share incentives and TUPE. There are two common hurdles that prevent claims:

  1. Many plans include clauses disclaiming liability.
  2. Employment tribunals are reluctant to deal with claims over loss of share rights.
  3. Most plans will have set down what happens upon a TUPE transfer – this is the best situation as the new employer knows what is required.

The biggest area of dispute arises in private companies over the method of calculating share value. The well-advised will have a process for valuation set out in the share documentation (usually the articles or shareholders agreement) designed to avoid disputes.  The not so well advised will have to create the method for calculating the share value and be prepared to argue it out.


Catherine Gannon

Catherine is well known for turning complex problems into solutions. No case is ever easy but she will find a way. In her spare time she runs Gannons a very successful law firm.

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